Real estate is usually one of the first investment options we consider when wondering how to multiply money. With property investments, most investors can expect a decent return potential. As one gets more seasoned, well-connected, and is lucky with property values, the returns could become quite lucrative.
What’s more, property investments can serve to diversify an investment portfolio, which becomes a buffer during recessions or any other downturns in one’s economic situation.
However, the first question that springs to mind is; how does one go about investing in real estate? There is no one best way to take the first step, but there are some simple ways that every potential investor should be aware of.
In short, there are a lot of ways in which one can invest in all sorts of real estate. Each choice will bring you different kinds of capital requirements, various risk levels, and varying investment dynamics. Every individual and their situation is different. So, only you can work out which kind of real estate investment will be best for increasing and safeguarding your wealth.
Simple Ways to Invest in Real Estate
There are a lot of guides out there that claim to give you the best advice on how to invest in real estate. Let’s have a detailed look at some of the top 5 methods now:
1. Purchase and Handle Rental Property
Among the most obvious ways of earning from real estate is buying a property and renting it out to tenants. The investment property in question could be commercial or residential, with both having their own pros and cons.
If their funds permit it, investors can also buy several investment properties and diversify their assets in this way. This step will get them several income streams as well, granting them a buffer if and when one property doesn’t have tenants.
When you own rental property, you can build up wealth and generate income for your daily needs as well. The property will usually increase in value over time, as is usually the case with the housing market in the U.S. The return potential is quite strong here as we’re combining the income, property appreciation, and equity factor as well.
Moreover, most investors will also have easy leverage when they start buying real estate. Leverage means that they can get some borrowed capital to increase the return potential of their investment.
Downsides of investing in rental properties
All benefits and potential aside, there are definite downsides to going for rental properties when investing in real estate. It might be the right way for some, but not for every single investor who wants to make it big. Here are just a few drawbacks that you should consider before taking the first step into the rental venture:
- High cost of entry: Even if you get a loan, buying even one rental property requires a large amount of money. Most banks and other lenders would require at least a 25 percent down payment before they’ll approve an investment property loan. Plus, you’d probably need to invest quite a bit before your rental gets decent tenants; the cost of advertising, getting a real estate agent, repairs, renovations, staging, and general maintenance can add up to quite a hefty amount. Most experts also say that it’s only logical to have enough cash reserves for several months’ expenses. Put it all together, and it’s evident that buying rental properties isn’t for every investor level.
- A volatile market: There’s a lot of uncertainty going on in the real estate market, and the rental properties are a prime example of it. Tenants might not be able or willing to pay rent at any given month. With squatters’ rights, you might not even be able to evict tenants for a year or several months. In the meantime, you’re getting no income and are losing money on your property. Even with decent tenants, accidents can happen; fires, natural disasters, or a family moving on when they find a better place. In short, the return potential is amazing for most properties but the short-term risks are very real.
- Requires a lot of commitment: We have already touched upon the financial demands of a new rental property. But the time factor is another story altogether. Having a rental means that you’re responsible for everything that goes on there. Some investors might be able to afford a property management company but the ultimate responsibility always comes back to them. Just a few pressing and potentially difficult tasks include intensively screening tenants, narrowing down the perfect location, and so on.
Before you decide to go for a rental property as your real estate investment, stop and think about the pros and cons. If the drawbacks don’t intimidate you, this might be the right path to choose. Whether you’re asking ‘what is a mobile home community?’ or ‘what apartment units can get me the highest rental rates?’ do make sure to get a mentor who is highly experienced in the game.
2. Investing in Real Estate Stocks
REITs stand for real estate investment trusts, but there are other kinds of real estate stocks you can go for as well.
When you choose to invest in REITs, you’re being part of a specialized company that manages, owns, or operates real estate assets. They get their income from these assets, and are required to disburse the majority of these earnings to their investors.
Most REITS have their trade on the regular stock exchanges. So, it’s quite easy to buy and sell them. Starting off with this method of investing in real estate is a good idea, as all you require is an internet connection and a little capital. It’s a great way to begin for those who have very little experience in real estate investment.
Some would place real estate ETFs (exchange-traded funds) and real estate mutual funds in the same category at REITs. An investor can also get a readymade portfolio of various REITs if they want to diversify their investments.
Real estate ETFs are those organizations who invest assets most in derivatives like equity REIT securities. They offer low expense ratios and a passive tracking of indexes for the major real estate market. With this index tracking, investors can hope to get useful exposure to larger real estate sectors but without the risk of gambling a large amount of capital on a single company.
We should also understand here that some types of real estate stocks aren’t REITs. These are the stocks that belong to homebuilders and land developers. If one wishes, they can use the stock exchange to invest in these ventures as well.
In a nutshell, REITs are what you need to start investing in real estate but without the hands-on, committed approach. You can also choose for hybrid kinds of REITs, or opt for equity. The returns on such investments are usually high, so investing here is a good choice if one is strapped for time.
As with real estate investment in the form of rental properties, getting a mentor can really take your place. When you’re investing in real estate for the first time, there are several books you can read to get in on the details. However, getting personal help from a person who has been successful in this field can give you some valuable insight that could take your investments to the next level.
3. Consider Becoming a Part of a Crowd funding Opportunity
With technical advancements in every industry, investors in real estate also have to keep their minds and eyes open for new opportunities. Crowd funding is one of these; it’s a relatively new method for investing in real estate and has a rapid growth rate.
The main idea of crowdfunding is to raise funds for a certain project or purchase from various people. Think of websites like Kickstarter; a potential entrepreneur floats their idea online and asks for help in getting started. If someone finds the prospect worthwhile, intriguing, exciting, or necessary, they donate a little towards the goal. At times, the people contributing the money also get a share in the project and its returns.
The aim of real estate crowdfunding opportunities
In real estate, the basic aim is to have a seasoned real estate developer identify a potentially lucrative investment opportunity. These opportunities usually involve a commercial real estate asset along with a modification that adds value to it. The modification might have restructured the debt on the property or be a whole renovation of the place.
The developer will plan to either refinance or sell the property by a certain date. However, they want to get some of the necessary capital from real estate investors. They might not want to use their money or go for bank financing; some may not be in a position to go for either of these options.
When investors contribute towards the project here, they get some equity interest in return.
Where to find crowdfunded investment opportunities for real estate
There are many such opportunities available on online platforms. CrowdStreet and Realty Mogul are two of the best examples. Such platforms provide a link between real estate developers and investors. The developers are also sometimes called the deal sponsors.
A decent crowdfunding platform will make sure that the listed investments are genuine and legal, along with meeting certain quality standards. The administrators of these platforms should also be responsible for collecting money from the investors for the sponsors.
Advantages of crowdfunding as a real estate investment option
So, why should we go for this kind of real estate investment? Here are some of the major advantages of this method:
- First, the return potential is quite large. It might be larger than what you get from investing in REITs. A crowdfunded real estate project might easily target internal rates of return or IRR of 15 percent and above. We now have the early results of such projects, and they indicate that the high returns are absolutely possible.
- You can get some income with these projects along with a large lump-sum in return after the developer manages to sell the property. At the same time, you don’t have to offset the income with the huge responsibilities and risks of renting out a property.
- Such projects will also diversify anyone’s investment portfolio and their overall strategy. You might be able to piggyback your way to success – thanks to an experienced developer. Even if a beginner manages to get the funds and start these projects, the outcome will probably not be as enticing and potentially lucrative as with a seasoned developer at the wheel.
Drawbacks of crowdfunded real estate investing
Don’t fall for the temptation of these opportunities too quickly; there are always downsides to consider in any sort of investment. For crowdfunding, check out these possible risks:
- The value-adding component of crowdfunding also means execution risk. Some of the targets can be quite ambitious, and it isn’t always possible to follow through on all the promises. The execution risk is what you face when there’s a possibility that certain plans won’t be successful when they’re finally put to action.
- With crowdfunding, you have to compromise on lower liquidity levels. One cannot get out of such an investment very easily, unlike other forms of real estate investing. Before the project is complete and the property is sold, you probably won’t see most of the money again. That means that the cash will be tied up for as long as the project takes and no sooner.
Overall, going for crowdfunding might be a good fit with certain investors. However, there are many factors to consider before taking a step in this direction.
4. Fixing and Flipping
For those who have some capital on hand and want to be hands-on with their investment, flipping houses might be the best way to go. Fix-and-flip or simply flipping houses refers to the strategy of buying a fixer-upper home, investing in renovations and repairs, and then, selling it for a tidy profit.
There have now been a lot of TV shows dedicated to flipping houses. These have caught the attention of their target audiences and also investors. After all, there might be a huge amount of money in a flip provided one does it properly.
It’s important to remember here that this is hardly a passive sort of investment. There’s also quite a high risk involved, as it might not go according to plan sometimes. Even with a lot of effort and investment, a problematic house might never become attractive enough for buyers with a lot of money. Experienced professionals might do it better, but even then there’s no guarantee of success.
What to keep in mind when flipping houses
If an investor does want to try flipping houses, they should keep the following factors in mind:
- The money is made upon buying, not selling. When you shop for a property, you must remember the 70 percent rule. The repairs, holding costs, acquisitions costs, etc., should be more than 70 percent of what you plan to sell for. The margin will be a nice cushioning against the uncertainty in this particular investment type.
- Time is important in the area, as you can reduce profits if repairs and renovations are taking too long. It might be best to schedule renovations before closing the bid on the property. Plus, set realistic expectations while selling in order to get the home off the market as quickly as possible.
Building on spec
Building a home on spec is similar to fixing houses, and then, flipping them. The investment dynamics are somewhat similar, but here you’re building the home from scratch. If you can manage to pull off your plans with success, having a spec home to sell can be a very lucrative strategy for investing in the real estate market. For now, there are a limited number of new homes and a lot of people looking for a permanent place to stay.
Interesting, working on a spec home might be less of a gamble than flipping a home that’s already built. With a spec home, you have an estimate of the constriction costs. There’s also no risk of encountering unexpected places and items that need major repairs. Moreover, old homes can have dangerous infestations of bees, termites, and other pests. When you’re building a brand new home, there are no such risks on hand.
On the other hand, one does have to consider the amount of time these spec houses take. When you’re flipping houses, the structure is already there. With all the renovations, it might take around two months to fix everything up just the way you like it. Making a whole new home will require a lot more time. Taking too long can lead you to experience market fluctuations, so it’s a bit of a gamble to assume that things will remain the same while you’re building a house.
Whether you’re considering building a spec home or flipping a mediocre property, make sure that the returns are at par with all that you put into the task. Your efforts are physical, financial, and even emotional at times. So, you want to be fairly sure of getting something decent in return.
5. House Hacking
House hacking involves a combination of buying your own home and buying a rental property. Within this concept, investors buy a residential property with at least two units or more. They start living in one of these themselves and get income by renting out the rest of the units. The same concept applies if someone buys a regular home and rents out one or more of their rooms.
Advantages of house hacking
This practice has several advantages. Let’s check them out now:
- Not only are you collecting on rent, but you’re also on hand to check out any possible problems. You’re close to your tenants, which could help in establishing a good relationship with them.
- At the same time, you stand to benefit from the equity and value of your property.
- House hacking is also relatively low-cost when it comes to investing in real estate. A beginner might find it easier to begin a rental properties portfolio with such an investment.
- There are also tax advantages to consider in this situation. Since the landlord lives in the property, they might qualify for lower requirements for down payments. This is known as primary residence financing, and can even apply to residential properties with multiple units. The landlord might have to live there for a specified time; after that, they can repeat the whole process by buying more multi-unit properties and living there as well.
Downsides of house hacking
There are some downsides of the investment strategy that might be deal breakers. Here are some of them now:
- The biggest issue with house hacking is the lack of privacy. Living next door to your tenants can cause awkwardness with both parties, especially when there’s an issue of non-payment or raising rents.
- Living in a unit might not be enough for people with large families. However, landlords who want the tax benefits have to shun larger homes for a while even if they can afford it.
Traditionally, real estate was long seen as a game for those who are already wealthy and have strong connections. If history and published data is anything to go by, real estate has been the investment with the best performance in the U.S. for almost a century. While there might have been unfair advantages leading to real estate moguls, there’s now a lot of new hope for new and beginner investors. It’s now possible to build up wealth using real estate at only a fraction of the traditional cost.
With so many ways and means to get into this lucrative market, almost anyone can make it in real estate if they put in the hard work. Start thinking about these ways today and see which one seems the most likely option.